Written evidence submitted by Global Witness
1. Global Witness is a non-governmental
organisation based in London that investigates the links between
natural resource extraction, corruption and conflict. Our investigations
and campaigning were a key catalyst in the creation of the Kimberley
Process, to tackle the trade in conflict diamonds, and the Extractive
Industries Transparency Initiative (EITI), to encourage transparency
over payments and receipts for natural resource revenues. We were
co-nominated for a Nobel Peace Prize in 2003 for our work on conflict
diamonds, and were awarded the 2007 Commitment to Development
Ideas in Action Award, sponsored jointly by Washington DC-based
Centre for Global Development and Foreign Policy magazine.
2. We are aware that some of our colleagues
in development NGOs will respond to the first two questions posed
by this inquiry emphasising the importance of ensuring that aid
flows to the developing world are maintained despite the pressures
on donor budgets, since many of the worst effects of the financial
crisis will be felt in the world's poorest countries. The purpose
of Global Witness's submission is to focus on the third and fourth
points posed by the inquiry: the impact of the economic downturn
on public support for development expenditure, and the effectiveness
of DFID's strategy for strengthening public support for its work.
3. Public support for development expenditure,
particularly at a time when there is pressure on public budgets,
depends on a public perception and understanding that the aid
is necessary, and is effective. DFID, along with all donor agencies,
already has to deal with a generalised public perception that
aid money is itself subject to being looted. What is even more
damaging, however, is the growing public awareness that aid can:
(a) subsidise and legitimise the looting of state
revenues that ought to allow poor countries to stand on their
own feet independently of aid;
(b) be undermined by a failure to prevent the
financial system's facilitation of state looting; and
(c) be undermined by the activities of UK companies
operating in conflict zones.
4. This submission will briefly outline
the ways in which these can occur, and propose a series of recommendations
to help prevent them occurring.
5. In many of the countries where Global
Witness undertakes its investigations, natural resources could
provide significant development potential. In 2007 exports of
oil and minerals from Africa were worth roughly $260 billion,
nearly eight times the value of exported farm products ($34 billion)
and nearly six times the value of international aid ($43 billion).[43]
6. This huge transfer of wealth could be
one of the best chances in a generation to lift many of the world's
poorest and most dispossessed citizens out of poverty. But in
too many cases, these revenues are not contributing to development,
but are being looted by those running the state. Economist Paul
Collier has noted that of the world's poorest one billion people,
a third live in resource-rich countries.[44]
7. The Doha Declaration on Financing for
Development, agreed by 160 states at the Follow-up International
Conference on Financing for Development to Review the Implementation
of the Monterrey Consensus in December 2008, agreed that "Capital
flight, where it occurs, is a major hindrance to the mobilization
of domestic resources for development."
8). Research by Raymond Baker, author of
Capitalism's Achilles Heel and director of the Global Financial
Integrity Program at the Center for International Policy suggests
that illicit capital flows out of developing countries reach,
at a conservative estimate, $850 billion to $1 trillion a year.[45]
Some of this figure is accounted for by transfer mispricing as
corporations avoid tax through the use of tax havens, a problem
which could be curtailed through a multilateral agreement on automatic
exchange of tax information and accounting standards which required
companies to account for their activities in each jurisdiction
rather than aggregated by region as at present. But some of this
devastating outflow is accounted for by corrupt flows of money
that has been looted from state coffers.
9. Therefore one of the primary impacts
that the UK and other developed countries can have on poverty
reduction is to stop the state's own resources being looted in
the first place, so that these funds are available for development.
Unfortunately, donors rarely have real incentives to confront
bad governance and corruption, since their staff are rewarded
largely on the basis of managing a portfolio of projects and ensuring
the money is disbursed, leading to an overall tendency to try
not to rock the boat. This problem is magnified when the money
is being disbursed by multilateral institutions that are further
removed from the taxpayers who have provided the funds.
AID SUBSIDISES
AND LEGITIMISES
LOOTING OF
STATE RESOURCES
10. Whereas some developing countries are
fortunate enough to have a benevolent government which operates
with the best interests of its citizens in mind, others are not
so lucky. What binds the resource-rich countries that Global Witness
has investigated is the emergence of a "shadow state",
one where political power is wielded as a means to personal self-enrichment
and state institutions are subverted to those needs. Behind the
façade of laws and government institutions of such states
is a parallel system of personal patronage predicated around extraction
of resource rents. Through the wholesale subversion of bureaucratic
institutions and control of force, the leaders of such states
are able to exploit their countries' resources in order to enrich
themselves, and to pay for the means to stay in power, both through
patronage and a bloated military and security apparatus. Meanwhile,
in many cases the country's international donors step into the
breach, supporting the basic functions of the state with their
aid, which leaves the kleptocratic rulers free to get on with
the more lucrative business of stripping the state of its assets.
11. To give an example: Global Witness's
work on Cambodia has systematically exposed high level corruption
in the country's natural resources sector. Our report Cambodia's
Family Trees: Illegal logging and the stripping of public assets
by Cambodia's elite, published in June 2007, provided extensive
evidence that Cambodia is being run by a kleptocratic elite that
generates much of its wealth via the seizure of public assets,
particularly natural resources. The forest sector provides an
especially vivid illustration of this asset-stripping process
at work. The report showed how Cambodia's most powerful logging
syndicate is led by relatives of Prime Minister Hun Sen and other
senior officials, and that the army, military police, police and
Forest Administration are heavily involved in illegal logging.
This report can be downloaded at http://www.globalwitness.org/media_library_detail.php/546/en/cambodias_family_trees
12. In February 2009, Global Witness published
a follow up report, Country for Sale: How Cambodia's elite
has captured the country's extractive industries. It shows
how, having made their fortunes from logging much of the country's
forest resources, Cambodia's elite have now diversified their
commercial interests to encompass other forms of state assets,
including land, fisheries, and the country's emerging petroleum
and mineral industries. Patterns of corruption and patronage found
in the forest sector, and documented by Global Witness over 13
years, are now being duplicated in the extractive industries,
as the same political elite who squandered the country's timber
resources are now responsible for managing its mineral and petroleum
wealth. Payments from extractive companies totaling millions of
dollars appear to have gone missing. The report can be downloaded
at http://www.globalwitness.org/media_library_detail.php/713/en/country_for_sale
13. The Cambodian government has never responded
substantively to any of these allegations, beyond threatening
Global Witness staff after the publication of Cambodia's Family
Trees, and issuing a bland denial of the allegations in Country
for Sale from its embassy in London, accompanied by a bizarre
cartoon depicting one of Global Witness's directors as an unidentified
rodent. (See http://www.globalwitness.org/media_library_get.php/795/1238776689/media_release_royal_embassy_of_cambodia_5_february_2009_revised.pdf)
14. Meanwhile Cambodia's international donors
have continued to increase their aid provisions, without using
the leverage this aid gives them effectively to tackle the corruption.
The donors have refused to acknowledge the fact that the government
is thoroughly corrupt and does not act in the best interests of
the population. As a result, billions of dollars-worth of aid
funded by western taxpayers has done relatively little to improve
the lives of ordinary Cambodians.
15. Donor countries now provide the equivalent
of over half of Cambodia's annual budget. As such, they have considerable
leverage and influence. Donor support has failed to produce reforms
that would make the government more accountable to its citizens,
however. Instead, the government is successfully exploiting international
aid as a source of political legitimacy. We would like to draw
your attention to the table on pages 56-57 of Country for Sale,
entitled How to give money and still not influence people.
The chart shows how each year, repeatedly, basic governance and
transparency reforms agreed by the Cambodian government and its
donors have not been implemented. Yet each year the amounts provided
by the donors have increased. The result is to encourage a culture
of impunity, in which Cambodia's rulers can continue their corrupt
practices with what is effectively endorsement, as well as practical
support, from the international donor community.
16. The opportunity for leverage offered
by aid will not exist indefinitely; as Cambodia begins to exploit
its oil, gas and minerals it will be able to ignore donors' provisions
with increasing impunity and, on current form, will be heading
for fully-fledged resource curse status. So the limited window
of opportunity that currently exists to build transparency and
good governance into Cambodia's natural resource sector should
be grasped by its donors. As a first step, donors need to make
further disbursement of non-humanitarian aid conditional on the
introduction of the basic governance and transparency requirements
agreed in previous donor-government consultations of the past
14 years.
17. DFID provided £22 million to Cambodia
in 2007-08 and cites among its country priorities "making
aid effective", "governance" and "natural
resources".[46]
Despite this, DFID—alongside other donors—has not
publicly called the government to account on its failure to honour
its commitments to human rights, transparency and anti-corruption
efforts. Neither has it called the government to account on evidence
presented by Global Witness and others on incidents of land grabbing,
illegal logging and the capture of Cambodia's extractive industries
by a small handful of individuals at the top of the political
and military chain of command. As such, the basic political economy
which underpins the looting of Cambodia's state assets remains
unchallenged and unshaken.
18. The Extractive Industries Transparency
Initiative (EITI) and budget support is a case in point. EITI
is a basic transparency instrument to support improved governance
in resource-rich countries through the verification and full publication
of company payments and government revenues from oil, gas and
mining. As such, it is a first step towards avoiding the resource
curse in a high-risk country such as Cambodia. In June 2007, Global
Witness held a meeting with DFID in which we were told that government
endorsement of the EITI was to be made a non-negotiable benchmark
of a direct budget support package. In November 2007, Global Witness
attended a meeting at which DFID admitted that the requirement
to endorse the EITI had been watered down to an "agreement
to consider endorsing the EITI". In October 2008, it was
announced that the government had decided not to join the initiative.
Global Witness has raised this with members of the donor community,
to be told that the government is now working towards the broad
financial principles of the initiative, but to use the term EITI
is too politically sensitive and they fear pushing the government
too hard will lead them to walk away from the table. The status
of EITI in Cambodia is currently unclear, but to date provides
a worrying example of how Cambodia's donors are unable or unwilling
to effectively deal with government intransigence on matters of
natural resource governance.
AID IS
UNDERMINED BY
A FAILURE
TO PREVENT
THE FINANCIAL
SYSTEM'S
FACILITATION OF
STATE LOOTING
19. It is increasingly recognised that corruption
cannot take place without the facilitating services provided by
the financial system and the pinstripe army of bankers, lawyers,
accountants and trust and company service providers. The amounts
of money involved in state looting are so large that they cannot
be stolen in the first place unless there is somewhere to put
them.
20. Global Witness's latest report, Undue
Diligence: How banks do business with corrupt regimes, provides
a number of alarming case studies showing how some of the world's
most objectionable dictators and warlords have done business with
some of the world's largest and most well known banks. By accepting
these customers, banks are contributing to corruption and poverty
in some of the poorest countries in the world. These are countries
which are rich in natural resources which could be used to lift
their populations out of poverty, but where these resources have
been captured by a small minority for their own benefit. The report
can be downloaded from www.undue-diligence.org
21. The report explains how anti-money laundering
laws ought to be preventing this, by requiring banks to do "due
diligence" to identify their customer and their source of
funds. But these laws are not working well enough. One of the
reasons for this is a failure of the culture of due diligence
in banks, and a failure by regulators to police it properly. Another
reason is the lack of international cooperation in curtailing
flows of corrupt funds, particularly when national laws are impeded
by bank secrecy laws and the opacity offered by other jurisdictions
including tax havens.
22. One of the examples in Undue Diligence
shows how the son of the President of Congo-Brazzaville, responsible
for marketing the country's oil, used the secrecy offered by a
British tax haven, Anguilla, to set up a company and disguise
his ownership of it. He then opened a bank account for this company
in Hong Kong, into which Congolese oil revenues were paid.
23. These oil revenues should have been
used for poverty alleviation in Congo. Instead, he used this account
to pay his personal credit card bills after repeated designer
shopping sprees totally hundreds of thousands of dollars in Paris,
Monaco, Marbella and Hong Kong. Just one of his credit card bills,
for June 2005, came to $32,000. This would have paid for 80,000
Congolese babies to be vaccinated against measles, a major cause
of child death.
24. Another example in Undue Diligence
shows how a branch of Barclays has been holding an account for
Teodorin Obiang, the son of the president of Equatorial Guinea,
Africa's third largest oil producer. Teodorin earns $4,000 a month
as a minister in his father's government, yet owns a $35 million
mansion and a fleet of fast cars, including a Ferrari which was
paid for from the Barclays account. A US bank, Riggs, collapsed
in a huge corruption scandal due to holding accounts for the Obiang
family. What due diligence has Barclays done to reassure itself
that the funds in this account are not the proceeds of corruption?
Global Witness has asked Barclays; it will not say.
25. It is inconsistent for the UK to be
committing £5 billion in aid internationally, and committing
to make poverty history, when the UK's own financial institutions
and tax havens are instrumental in facilitating the looting of
state resources that could, if used properly in some of the affected
countries, render these countries independent of aid. But tackling
the UK's financial services industry and tax havens will not be
enough; money moves globally, and so the UK must use its influence
globally to ensure that the anti-money laundering net is tightened
across the board.
AID IS
UNDERMINED BY
UK COMPANIES OPERATING
IN CONFLICT
ZONES
26. In August 2008 the UK company Afrimex
was found by the UK government to have breached the OECD Guidelines
for Multinational Enterprises by purchasing minerals from a war-torn
region of the Democratic Republic of Congo (DRC). The government
upheld the majority of the allegations in a 2007 complaint lodged
by Global Witness. The complaint alleged that Afrimex had made
payments to the rebel group Rassemblement congolais pour la démocratie-Goma
(RCD-Goma), which controlled the area and committed grave human
rights abuses. Global Witness also alleged that the company had
bought minerals produced in very harsh conditions, including forced
and child labour. Global Witness's complaint is available at http://www.globalwitness.org/media_library_detail.php/507/en/complaint_against_afrimex_uk_ltd_under_the_specifi
27. The UK National Contact Point (NCP)—the
British government body which considers complaints brought under
the OECD Guidelines—affirmed that Afrimex initiated demand
for minerals from a conflict zone and used suppliers who had made
payments to RCD-Goma. It concluded that Afrimex had failed to
contribute to sustainable development in the region and to respect
human rights, and that it applied insufficient due diligence to
the supply chain, sourcing minerals from mines that used child
and forced labour. The NCP said that Afrimex's failure to apply
any conditions on its suppliers during the war was "unacceptable
considering the context of the conflict and human rights abuses
taking place." The NCP laid out steps that Afrimex should
take to improve the human rights impact of its activities in DRC,
but Afrimex has not provided any information on whether it has
implemented these recommendations. The Final Statement by the
NCP is available at http://www.berr.gov.uk/files/file47555.doc
28. In addition, the Thailand Smelting and
Refining Corporation (THAISARCO), a subsidiary of the UK company
Amalgamated Metal Corporation (AMC), was cited along with Afrimex
by the Final Report of the UN Group of Experts in December 2008
as buying from comptoirs (trading companies) who are "directly
complicit in pre-financing négociants, who in turn work
closely with the FDLR." The Forces Démocratiques pour
la Libération du Rwanda (FDLR) is one of the main armed
groups operating in eastern DRC and has been responsible for grave
human rights abuses against unarmed civilians.[47]
29. The UK is one of the largest bilateral
aid donors to the DRC. Its aid contribution to DRC is around £70
million, due to rise to £130 million by 2010-11.[48]
This is seriously undermined if British companies are able to
do business in a way that fuels the conflict in eastern DRC.
RECOMMENDATIONS
30. The simplest and most effective action
the UK can take to strengthen and ensure continued public support
for development expenditure during the downturn is to make it
extremely clear that this aid is effective and that taxpayer money
is not being wasted. DFID needs to show that the leverage it gains
from its aid is being deployed effectively to prevent corruption
and promote good governance, and that its aid will not prop up
corrupt regimes that show no interest in reform. DFID also needs
to work with other government departments, and ensure that the
UK cooperates internationally to ensure that aid flows are not
undermined by illicit flows that are facilitated by transactions
through our financial system, nor by the activities of British
companies operating in conflict zones. Fundamentally, this needs
to be an approach that is taken across government departments.
31. The following actions would help to
make this happen:
(a) DFID should develop its overall anti-corruption
strategy to recognise explicitly not only the risk of its aid
to particular projects being siphoned off, but that no aid programme
is effective if it legitimises corruption elsewhere in an economy,
and if state looting is still made possible by failures in the
anti-money laundering system.
(b) DFID's anti-corruption strategy should work
with civil society to set out anti-corruption benchmarks that
recognise how susceptible natural resource extraction is to corruption
and capture by corrupt rulers. Aid disbursement programmes should
all be attached to clear and non-negotiable anti-corruption and
good governance benchmarks, particularly where natural resource
are critical to the economy, and disbursement of aid must be made
conditional on achievement of these benchmarks (something that
Global Witness has not observed in the UK's aid to Cambodia).
(c) DFID should take a lead role with the other
donor countries in the international community, including the
EU and the World Bank, to ensure that they adopt the same approach.
A robust response to corruption will of course not work unless
it is a joined up effort by the donor community. It is particularly
important, in the case of countries where DFID has taken a decision
to reduce its direct contribution and instead funnel its assistance
through the multilateral institutions such as the World Bank,
that the UK uses its influence as a major donor to the World Bank
to ensure the Bank's aid is dependent on similar, enforced, anti-corruption
benchmarks.
(d) DFID should put pressure on other UK government
departments, the Treasury in particular, to ensure that the UK
uses its influence to improve international cooperation to tighten
up the global anti-money laundering framework to help curtail
flows of corrupt funds. This should begin by strengthening the
Financial Action Task Force (FATF), a little-known inter-governmental
body, of which the UK held the presidency last year. It sets the
standards for the anti-money laundering laws and evaluates its
member states' legislation, and could be hugely influential. But
currently it is a technocratic body, whose civil servant participants
operate with little parliamentary oversight, and which is not
using its powers to name and shame its own member states. Many
of its key members do not reach its own standards.
The mandate to tackle FATF has been established
by the recent G20 summit communiqué; the annex noted that
"We agreed that the FATF should revise and reinvigorate the
review process for assessing compliance by jurisdictions with
AML/CFT standards, using agreed evaluation reports where available."
The UK should take a lead in reforming FATF to
ensure that it:
(i) focuses on corruption as strongly as
it has focused on terrorist financing;
(ii) names and shames its own members who
have not reached its standards, and who are not enforcing them;
(iii) publishes a clearly accessible roster
of each country's compliance status with each of its recommendations,
and the date by which that country has to comply;
(iv) makes its workings more transparent,
including by voting in open sessions;
(v) engages more closely with other actors
working on anti-corruption and development issues; and
(vi) does not permit the existence of bank
secrecy laws that hinder both investigations and customer due
diligence.
(e) DFID should put pressure on other UK government
departments, the Treasury in particular, to use its influence
to push for each jurisdiction to publish open registries of beneficial
ownership of companies and trusts as a condition of FATF membership.
These are the most commonly used vehicles to hide ownership of
corrupt money. This does not just apply to the more commonly recognised
tax havens; by allowing UK companies to cite nominee directors
and shareholders in company listings, the UK itself is allowing
companies to obscure their ownership.
(f) DFID should put pressure on other UK government
departments, the Treasury in particular, to reform banks' culture
of due diligence as part of its overhaul of the financial regulatory
system. The UK government should require the UK's banks to conduct
an audit of accounts held worldwide for "politically exposed
persons", as a first step towards reforming their culture
of due diligence. If the bank cannot demonstrate that the customer's
source of funds is not corrupt, the account must be closed.
(g) DFID should ensure that the UK takes part
in the multi-stakeholder Task Force on Illicit Financial Flows
that is being funded by the Norwegian government.
(h) DFID should ensure that the UK government
submits to the UN Sanctions Committee names of individuals and
companies registered in the UK who are known to be buying or trading
in natural resources produced by or benefiting armed groups. UN
Security Council Resolution 1857 includes in the categories affected
by sanctions "individuals or entities supporting the illegal
armed groups in the eastern part of the Democratic Republic of
Congo through illicit trade of natural resources."
(i) DFID should ensure that the UK government
provides clear guidance to companies purchasing or trading in
minerals from eastern DRC or intending to do so in the future.
Companies should be publicly warned that they should proceed with
caution, that the government will monitor the implications of
their activities, and that they could face a number of liability
risks if they are found to be assisting or facilitating human
rights abuses. The UK government should insist that companies
carry out the highest level of due diligence regarding their entire
chain of supply to ensure that their trade is not contributing
to financing any of the warring parties in eastern DRC
43 World Trade Organisation, International Trade
Statistics 2007- Merchandise Trade By Product, p 44; Organisation
for Economic Co-operation and Development, African Economic
Outlook 2007-08, p 665. Back
44
Paul Collier, The Bottom Billion: Why the Poorest Countries
are Failing and What Can Be Done About It, Oxford University
Press, 2007, p 39. Back
45
Global Financial Integrity, Illicit Financial Flows from Developing
Countries: 2002-06, December 2008. Back
46
Figure for aid provided to Global Witness by DFID; http://www.dfid.gov.uk/countries/asia/Cambodia-facts.asp Back
47
Final report of the Group of Experts on the Democratic Republic
of the Congo (S/2008/773), United Nations Security Council, 12
December 2008. Back
48
DFID, DRC Country Plan, May 2008. Back
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